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IMF Executive Board Completes Second Review Under the Policy Coordination Instrument and Concludes 2019 Article IV Consultation with Republic of Serbia

July 19, 2019

  • Serbia’s economy has remained stable and growth in 2018 picked up to 4.3 percent, the fastest pace in 10 years.
  • Fiscal performance has been strong, while important reforms took place towards modernization of the tax administration and privatization of the largest state-owned bank.
  • However, Serbia remains vulnerable to spillovers from external developments, including weaker-than-expected growth in key trading partners.

OnJuly 17, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Serbia and completed the second review of Serbia’s economic performance under the Policy Coordination Instrument (PCI).

Macroeconomic stability has continued to take hold since the 2017 Article IV Consultation. After Serbia suffered a drought in 2017, growth in 2018 rebounded to 4.3 percent—its fastest pace in 10 years. Fiscal discipline has taken root, with the general government budget recording a surplus for two consecutive years and public debt falling by about 15 percent of GDP since the beginning of 2017. At the same time, unemployment has continued to decline, and employment has risen steadily, with informal employment making up a smaller share. Inflation has been kept low and the financial sector is stable, with the level of banks’ non-performing loans as a share in total loans reaching 5.5 percent at end-March 2019, the lowest level since 2008. Important recent reforms have been made towards modernization of the tax administration and privatization of the largest state-owned bank, while substantial progress was made in addressing Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) shortcomings.

The near-term outlook remains positive. Growth in 2019 is projected at 3.5 percent, with a pick-up in growth expected during the second half of the year due to strong foreign direct investment (FDI), continued public investment, and assumed recovery in trading partner countries. Inflation will move within the lower half of the inflation target band, while the current account deficit as a share of GDP is expected to widen modestly and remain fully covered by FDI. However, Serbia remains vulnerable to spillovers from external developments, including weaker-than-expected growth in key trading partners. Over the medium term, policies should be geared towards ensuring that structural drivers of growth are solid. This includes efforts to limit outflow of skilled labor by creating work opportunities within Serbia, as well as improve the private investment climate through the better provision of public services and reduction of the grey economy. Strengthening governance will also be critical, including providing legal certainty, as well as improvements in governance and efficiency of State Owned Enterprises.

At the conclusion of the Executive Board meeting, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, made the following statement:

“Serbia’s macroeconomic performance, supported by the Policy Coordination Instrument, has been strong. Growth has been robust, public debt is declining, employment is rising, the financial sector is sound, and inflation is low. Continued strong program implementation and determined structural reforms are important to address the challenges and accelerate income convergence with the EU.

“Fiscal policy is appropriately focused on reducing public debt, while contributing to growth and unwinding crisis measures. Increased infrastructure spending—together with improvements in public investment management—and reducing the tax burden on labor will help raise growth and employment. Going forward, preserving fiscal sustainability should be prioritized, including through the use of prudent fiscal rules.

“The accommodative stance of monetary policy has contributed to economic activity, while inflation remained under control. Over the medium term, greater exchange rate flexibility would help develop the exchange rate market and promote dinarization.

“Reforms of state-owned financial institutions need to be implemented vigorously to improve efficiency and strengthen confidence. Following the notable progress in addressing NPLs, the focus should turn to public institutions and the successful completion of the privatization of the largest state-owned bank.

“Structural reforms are advancing, but governance issues persist. Substantial progress has been made on AML/CFT deficiencies, leading to Serbia’s removal from FATF’s greylist. Building on recent tax administration reforms, further modernization efforts will be critical for strengthening collections and improving the business environment. Resolution of the remaining problem state-owned enterprises (SOEs) is progressing slowly and implementation of the public wage system reform should not be further delayed. Improved governance, including better corporate governance of SOEs, can raise efficiency and economic growth.”

Executive Board Assessment 2

Executive Directors welcomed Serbia’s strong macroeconomic performance supported by the Policy Coordination Instrument. Economic growth has been robust, public debt is declining, and inflation is low. Directors emphasized that continued commitment to strong policies and determined implementation of structural reforms is key to sustaining macroeconomic and financial stability, addressing external and internal challenges, fostering growth, and advancing the EU convergence agenda.

Directors underscored that maintaining a strong fiscal position and further reducing public debt, while accommodating growth enhancing measures is important. They highlighted that improving the quality and composition of spending is key for budget discipline and economic growth. Directors considered that implementation of a fiscal rule anchored on debt, reintroduction of pension indexation, reform of the wage system, and improvements in public employment frameworks, are important measures to bolster fiscal policy credibility.

Directors agreed that the accommodative monetary policy stance, under the inflation targeting framework, has been appropriate and contributed to economic activity. Noting the authorities’ cautious approach, they generally considered that greater exchange rate flexibility over the medium term would help develop the exchange rate market, and enhance dinarization.

Directors noted that vigorous implementation of the reforms of state‑owned financial institutions is essential to improve efficiency and strengthen confidence. They noted the good progress in addressing the nonperforming loans (NPLs) and looked forward to the successful completion of the privatization of the largest state‑owned bank in a transparent manner. Directors welcomed the authorities’ focus on improving capital markets and access to development finance.

Directors emphasized that stronger commitment to structural reforms is important. They commended the progress made on AML/CFT and Serbia’s removal from the FATF greylist. Looking forward, Directors encouraged steps to build on the recent tax administration reforms, improving the business environment, and further reform of state‑owned enterprises (SOEs). They highlighted that strengthening governance, including better corporate governance of SOEs, can raise efficiency and economic growth.

Serbia: Selected Economic Indicators, 2016-2020

2016

2017

2018

2019

2020

CR 18/375

Est.

CR 18/375

Proj.

Proj.

(Percent change, unless otherwise indicated)

Real sector 1/

Real GDP

3.3

2.0

4.2

4.3

3.5

3.5

4.0

Real domestic demand (absorption)

1.4

3.9

4.8

5.8

3.6

4.4

3.8

Consumer prices (average)

1.1

3.1

2.1

2.0

2.4

2.2

1.9

GDP deflator

1.5

3.0

2.4

2.0

3.3

3.3

3.5

Unemployment rate (in percent) 2/

15.9

14.1

13.3

Nominal GDP (in billions of dinars)

4,521

4,754

5,074

5,060

5,424

5,408

5,819

(Percent of GDP)

General government finances

Revenue 3/

40.8

41.5

41.1

41.6

39.9

40.8

40.1

Expenditure 3/

41.9

40.4

40.6

41.0

40.4

41.3

40.7

Current 3/

37.9

36.7

36.4

36.5

36.0

36.7

36.1

Capital and net lending

3.2

3.1

3.8

4.1

4.1

4.3

4.4

Amortization of called guarantees

0.9

0.6

0.4

0.4

0.2

0.2

0.2

Fiscal balance 4/

-1.2

1.1

0.5

0.6

-0.5

-0.5

-0.5

Primary fiscal balance (cash basis)

1.7

3.6

2.6

2.8

1.4

1.6

1.4

Structural primary fiscal balance 5/

1.7

3.5

2.7

2.9

1.8

1.9

1.8

Gross debt

68.9

58.7

54.0

54.5

51.9

52.3

49.3

(End of period 12-month change, percent)

Monetary sector

Money (M1)

20.3

9.7

8.1

20.1

9.4

10.7

9.8

Broad money (M2)

9.8

3.3

6.9

15.0

6.6

8.8

7.5

Domestic credit to non-government 6/

1.8

4.4

7.1

10.1

5.9

7.1

5.6

(Period average, percent)

Interest rates (dinar)

NBS key policy rate

3.5

3.9

3.1

Interest rate on new FX and FX-indexed loans

3.1

3.1

2.8

(Percent of GDP, unless otherwise indicated)

Balance of payments

Current account balance

-2.9

-5.2

-5.3

-5.2

-5.1

-5.6

-5.1

Exports of goods

34.9

35.9

37.1

35.6

38.4

36.0

36.8

Imports of goods

-43.4

-46.1

-48.6

-47.9

-49.4

-48.8

-49.2

Trade of goods balance

-8.5

-10.2

-11.5

-12.3

-11.1

-12.8

-12.4

Capital and financial account balance

0.6

4.8

5.7

6.5

5.7

6.6

6.7

External debt (percent of GDP)

75.7

67.2

61.3

61.7

57.4

58.3

55.1

of which: Private external debt

29.4

29.8

28.1

29.2

26.3

27.6

25.9

Gross official reserves (in billions of euro)

10.2

10.0

10.6

11.3

10.8

11.8

12.5

(in months of prospective imports)

5.5

4.7

4.5

4.9

4.3

4.7

4.6

(percent of short-term debt)

412.5

262.4

250.8

208.9

208.4

167.7

178.8

(percent of broad money, M2)

58.7

53.2

52.7

52.2

50.7

51.1

50.7

(percent of risk-weighted metric)

171.5

162.1

165.4

163.6

161.1

160.4

162.4

Exchange rate (dinar/euro, period average)

123.1

121.4

118.3

REER (annual average change, in percent;

+ indicates appreciation)

-1.1

2.9

2.8

Social indicators

Per capita GDP (in US$)

5,756

6,284

7,266

7,223

7,688

7,503

8,174

Real GDP per capita (percent change)

3.9

2.6

4.7

3.9

4.4

Population (in million)

7.1

7.0

7.0

7.0

7.0

7.0

6.9

Sources: Serbian authorities; and IMF staff estimates and projections.

1/ SORS released revised national accounts in November 2018.

2/ Unemployment rate for working age population (15-64).

3/ Includes employer contributions.

4/ Includes amortization of called guarantees.

5/ Primary fiscal balance adjusted for the automatic effects of the output gap both on revenue and spending as well as one-offs.

6/ At constant exchange rates.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Gediminas Vilkas

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson

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